Copper, aluminum prices will stay elevated through 2009
The polls put the average London Metal Exchange (LME) cash copper price at $3.73/lb this year, up from $3.02 in 2007, and then at $3.58 in 2009. This latest forecast shows aluminum at an average of $1.34/lb in 2008 compared with the average traded cash price of $1.20 in 2007—and then rising to $1.44.
The aluminum market is being pulled in different directions by the opposing forces of rising energy prices (and therefore, higher costs and long-run prices) and possible growing surpluses in the near term. At the moment, the higher-cost argument is winning the pricing-outlook tug-of-war.
"Aluminum is entirely a power story; the price is being driven by rising energy prices and fear of production losses," analyst Adam Rowley at Macquarie Bank in London tells Reuters. "Prices have moved higher on energy concerns," he adds in an e-mail to Purchasing, noting that "even though there is no tightness in this market and a low probability of any tightness in next two years, there still is a fear of supply disruptions ahead."
That's because "the outlook for aluminum supply has tightened considerably," Barclays Capital analyst Gayle Berry writes to clients. "Aluminum has been the metal most affected by power-related supply losses this year and we believe that tight global energy markets will constrain the pace of future production growth," she adds, pointing out that 1.3 million metric tons of annual capacity worldwide is likely to be removed from global output this year.
Most analysts expect softer demand for copper, often seen as a key gauge for underlying economic activity, with the market turning into deficit in 2009.
"We have lost a reasonable amount of mine production, around 600,000 metric tons so far, and that has really kept the market well supported in an environment where the Chinese (the metal's top purchaser) have not been buying," Rowley tells Reuters. Then, in a note to clients, he points out that "copper prices continue to be well supported by ongoing heavy production losses, despite a weaker demand picture in 2008. This should continue to support prices in the next few years with more upside than downside to our forecasts being likely."
Rowley writes to clients that "copper appears to be the base metal still at risk of a substantial upward price move in the next 12 months." Despite a lack of Chinese buying interest since early this year, he says the copper market "appears to have stayed very close to balance (only in modest surplus) and reported stocks have actually been decreasing."
There have been copper production reductions in Peru, the world's second largest copper producer after Chile. And now, some analysts say further price spikes could be in store, possibly as high as $5/lb next year, given the low level of LME stocks, which these days account for just 2.5 days worth of global consumption. "It will not take much, perhaps another major mine problem or a burst of stronger than expected demand, to send prices spiraling sharply higher," analyst Berry tells Reuters.
Rowley also is indecisive in his note to clients: "Over the next two to three years, our forecasts continue to point to a gradual easing in copper prices, but we would note once again that the projected surpluses remain extremely small and are well below the level of mine losses seen over the past few years."